Not many retailers would want to turn the clock back to March 2009, the darkest hour of the worst recession since the second world war. With more than two million out of work and the stock market at its lowest ebb, economists were expressing real fears that the UK was on the brink of a 1930s-style slump.

But at the Warwickshire head office of no-frills supermarket Aldi, business was booming as the unloved German discount grocer unexpectedly became a recession darling. Consumer trend-watchers talked of the "Aldi effect" and dubbed its customers the "Aldi-rati" as middle-class shoppers embraced the "hard discounters", making £4.99 Canadian lobsters at Lidl and £7.99 bottles of Châteauneuf-du-Pape from Aldi the talk of the dinner party circuit.

The hype created a snowball effect that saw Aldi routinely chalk up monthly like-for-like sales increases of 20% – even 25% – in 2008 and 2009, an unprecedented level for a sector that rolls along at 4%.

Fast forward to 2010 and it is a different story. Aldi's stores in UK and Ireland fell to a £58m loss last year on sales of £2bn, while its smaller Danish rival Netto has quit the country, selling its stores to Asda. Recent market share figures from Kantar show upmarket chains Sainsbury's and Waitrose are the stars on the rise, with both chains gaining market share in the three months to 3 October, compared with the same period a year ago. Analysts say consumers have tired of austerity food shopping, with large supermarket groups reporting sales of their premium own labels picking up again, suggesting the upstart discounters may have had their day.

One industry executive believes the discounter market has a natural ceiling of 4-5% and that the chains, which had been underperforming prior to the recession, were able to play catch-up when it hit. "I can't see any reason why the discount market would get any bigger," he says. "Why would people seek out a limited range of brands, with names that they have never heard, at prices that are not much different to what is on sale in Asda and Tesco?"

Sainsbury's is now the fastest-growing member of the big four (the others being Tesco, Asda and Morrisons), while Waitrose is growing at twice the market rate. Detailed figures show Aldi underperforming the industry, with its market share unchanged on a year ago at 3%. Lidl is faring better, but its share is also unmoved at 2.4%.

In a statement, Aldi's joint group managing directors, Matthew Barnes and Roman Heini, blamed the slide into the red on a heavy investment programme: "We have invested significantly in upgrading all our existing stores and this has had an impact on the 2009 result."

Aldi was started by Karl Albrecht and his late brother Theo, who went into business after returning from active service in the second world war. Short for "Albrecht-Discount", they pioneered the discount format, which is based on selling fewer than 2,000 products, compared with a typical range of 20,000-30,000 in a major supermarket. The trade-off produces the high sales volumes that suppliers like, enabling Aldi to secure discounts that let it sell its mostly own brand products at rock bottom prices.

Aldi, which has approximately 450 stores in the UK, said the disposal of older stores and "surplus" assets accounted for over half of last year's loss. In its statement it added: "We are confident our continuing investment programme will lead to both increased turnover and profitability."

There is no doubt that the march of the "hard discounters" and the extreme reaction of shoppers to the recession caught the big supermarket chains off guard. But they mounted a vicious fightback. Tesco rebranded itself as "Britain's biggest discounter" and slashed the prices on thousands of goods. Waitrose took the unprecedented step of launching the entry-level Essentials range.

Even at the height of the hostilities, senior executives were privately scathing of what the hard discounters could and would be able to achieve. The big four chains speak for 75% of sales, with Tesco the dominant name at 30.9%. Indeed, one senior retailer described the discounter's growth plans as a "roundabout strategy" whereby they find the nearest roundabout to an Asda or a Tesco supermarket and plant a store there to capture passing shoppers.

But Bryan Roberts, retail insight director at Kantar, argues it is wrong to write off Aldi, one of the world's largest retail chains with more than 9,000 stores worldwide and an estimated group turnover of €48.6bn (£42.4bn): "Aldi is not losing market share, it is just plateauing. What we are seeing is a return to normality."